Sprint Company makes special equipment used in cell towers.Each unit sells for $400.Sprint produces and sells 12,500 units per year.They have provided the following income statement data: A foreign company has offered to buy 80 units for a reduced price of $300 per unit.The marketing manager says the sale will not negatively affect the company's regular sales.The sales manager says that this sale will require incremental selling & administrative costs,as it is a one-time deal.
-The production manager reports that it would require an additional $30,000 of fixed manufacturing costs to accommodate the specifications of the buyer.If Sprint accepts the deal,how will this impact operating income?

Question

Sprint Company makes special equipment used in cell towers.Each unit sells for $400.Sprint produces and sells 12,500 units per year.They have provided the following income statement data:  A foreign company has offered to buy 80 units for a reduced price of $300 per unit.The marketing manager says the sale will not negatively affect the company's regular sales.The sales manager says that this sale will require incremental selling & administrative costs,as it is a one-time deal.
-The production manager reports that it would require an additional $30,000 of fixed manufacturing costs to accommodate the specifications of the buyer.If Sprint accepts the deal,how will this impact operating income?

Quizplus · Accepted Answer

First, let's calculate the current operating income:

Revenue = Number of units sold * Price per unit = 12,500 * $400 = $5,000,000
Cost of goods sold = Variable cost per unit * Number of units sold + Fixed manufacturing costs = ($200 + $600) * 12,500 + $900,000 = $4,800,000
Gross profit = Revenue - Cost of goods sold = $5,000,000 - $4,800,000 = $200,000
Operating expenses = Selling and administrative expenses + Other expenses = $60,000 + $50,000 = $110,000
Operating income = Gross profit - Operating expenses = $200,000 - $110,000 = $90,000

Now, let's calculate the impact of the special deal:

Revenue from the special deal = 80 * $300 = $24,000
Incremental selling and administrative costs = $5,000
Incremental fixed manufacturing costs = $30,000
Total incremental costs = Incremental selling and administrative costs + Incremental fixed manufacturing costs = $35,000
Net income from the special deal = Revenue from the special deal - Total incremental costs = $24,000 - $35,000 = -$11,000

Since the net income from the special deal is negative, accepting the deal will decrease the operating income.

Therefore, the best choice is B) operating income will decrease by $14,960.

Sprint Company Makes Special Equipment Used in Cell Towers